Evergrande, the Chinese property giant that has been struggling to repay its massive debts, has filed for bankruptcy protection in the US. The move, which was announced on Thursday, will allow the company to shield its assets in the US while it works on a restructuring plan with its creditors.
Evergrande is one of the largest real estate developers in China, with more than 1,300 projects in over 280 cities. It also has interests in electric cars, football, and entertainment. However, the company has been facing a liquidity crunch since last year, when it defaulted on some of its debt payments. Evergrande owes an estimated $300 billion to various lenders, suppliers, and investors, making it the world’s most indebted property developer.
The company’s financial woes have sparked fears of a contagion effect on China’s economy and the global financial markets. Evergrande’s shares have been suspended from trading in Hong Kong since March 2022, and its bonds have been downgraded to junk status by rating agencies. The company revealed last month that it lost a combined 581.9 billion yuan ($80 billion) over the last two years.
How does Chapter 15 bankruptcy work?
Evergrande has filed for Chapter 15 bankruptcy protection in a New York court. Chapter 15 is a section of the US bankruptcy code that deals with cross-border insolvency cases. It allows a foreign company to protect its assets in the US while it works on a restructuring plan with its creditors in its home country or elsewhere.
Chapter 15 does not mean that Evergrande is insolvent or liquidating its assets. Rather, it means that the company is seeking recognition of its foreign restructuring proceedings in the US court. This will prevent any creditors or lawsuits from seizing or interfering with Evergrande’s US assets, such as bank accounts, real estate, or intellectual property.
Evergrande is not the first Chinese company to file for Chapter 15 bankruptcy protection in the US. In 2021, Peking University Founder Group, a state-owned conglomerate, also sought Chapter 15 recognition for its restructuring process in China. Other notable examples of foreign companies that have used Chapter 15 include Nortel Networks, Lehman Brothers, and Toys “R” Us.
What are the implications of Evergrande’s bankruptcy filing?
Evergrande’s bankruptcy filing is seen as a sign that the company is trying to avoid a disorderly collapse and reach a deal with its creditors. The company has been in talks with its bondholders and other stakeholders to restructure its debts and sell some of its assets. However, the negotiations have been complicated by the sheer size and complexity of Evergrande’s liabilities, as well as the involvement of various regulators and authorities in China.
Evergrande’s bankruptcy filing could also have an impact on China’s property market and economy. The property sector accounts for about a quarter of China’s GDP and is a major source of employment and consumption. Evergrande’s troubles have already caused a slowdown in construction activity and sales, as well as a drop in consumer confidence and investor sentiment. Some analysts have warned that a disorderly default by Evergrande could trigger a systemic crisis in China’s financial system and spill over to other sectors and countries.
However, some experts have also argued that Evergrande’s bankruptcy filing could be a positive step for China’s long-term economic stability and reform. They have suggested that Evergrande’s case could serve as a wake-up call for China’s policymakers to address the underlying problems of excessive leverage, moral hazard, and regulatory loopholes in the property sector. They have also pointed out that China has ample fiscal and monetary tools to cushion the impact of Evergrande’s debt crisis and prevent a hard landing for the economy.
